What should existing consumer credit providers be thinking about?
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There are some completely new requirements that existing creditors and credit intermediaries need to be aware of in terms of potential impact on their current processes, including:
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There is a new requirement for non-discriminatory treatment of applicants for consumer loans. Creditors cannot differentiate on the basis of a consumer’s nationality or place of residence. However, objectively justified reasons for different credit conditions remain possible.
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Restrictions on bundling consumer credit with insurance and other financial products are introduced.
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For consumers in financial difficulties, creditors will be required, where appropriate, to exercise reasonable forbearance before enforcement proceedings are initiated, including taking into account the consumer’s individual circumstances.
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Creditors must have processes and policies for early detection of consumers in financial difficulties to facilitate referral to independent debt advisory services (which must be easily accessible to the consumer).
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There are a number of new conduct of business obligations for creditors and credit intermediaries.
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However, the devil is also in the detail of CCD II, with a number of technical changes that could require significant lead times for necessary system and process updates. For example:
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While the information required for the prescribed form of pre-contractual information (Standard European Consumer Credit Information form – SECCI) is very similar to CCD I, a new layout means that significant systems changes are likely to be required.
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The CCD II requirements for creditworthiness assessments are more detailed than under CCD I. Among the new provisions is a requirement for creditors to establish procedures for the creditworthiness assessment and to document and maintain those procedures as well as the information on the consumer’s income and expenses and other financial and economic circumstances used to carry out the assessment. In addition, where the assessment involves the use of automated processing of personal data, consumers must be informed of their right to request and obtain human intervention from the creditor.
What’s next and how can Hogan Lovells help?
CCDII came into force on 19 November 2023. Member states now have until 20 November 2025 to adopt and publish their implementing measures, which will have to be applied 12 months from the transposition date, ie 20 November 2026.
The impact of CCDII is likely to vary considerably between different member states. Whilst some will have equivalent legislation already in place for some of the new requirements others will be starting with a clean slate. Member states are likely to be at an advanced stage of identifying where changes will be required to comply with the new requirements.
Across our EU offices, we have significant experience in supporting firms on related implementation projects, from undertaking initial gap analysis work, project managing and supporting the implementation of a rolling program of enhancements and operational changes.
Read on for a more detailed look at some of the key changes for existing consumer credit providers to be aware of.
Quick recap of the background to CCD II
CCD II is part of the Commission’s New Consumer Agenda, which was launched in 2020 to update the EU’s overall strategic framework for its consumer policy.
The CCD II proposal was introduced following the Commission’s review of the current Consumer Credit Directive (part of its 2020 work programme), which found that it had not kept pace with emerging consumer credit products, consumer behaviour and technological developments. Added to this was the fact that imprecise wording of certain provisions had led to member states adopting diverging provisions, resulting in a highly fragmented regulatory framework across the EU in a number of aspects of consumer credit, impeding the opportunities created by digitalisation, in particular, to develop the cross-border consumer credit market.
What are some of the key changes that existing consumer credit providers should be aware of?
Scope
Discretionary regimes
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The “lighter touch” provisions for agreed overdraft facilities in CCD I have not been included in CCD II. The relevant discretionary regime is now limited to overrunning, ie 'a tacitly accepted overdraft whereby a creditor makes available to a consumer funds which exceed the current balance in the consumer’s current account or the agreed overdraft facility'.
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There is a new discretionary regime for newly in-scope credit agreements which are either for less than EUR 200, 0% interest or repayable within three months. For more on the scope of CCD II, see our previous Engage article ‘EU Second Consumer Credit Directive: Scope and impact for buy-now pay-later (BNPL) providers’.
Regulation of creditors and credit intermediaries
- Previously, creditors were required to be supervised or regulated. This has now been expanded to require that both creditors and credit intermediaries are subject to an adequate admission process, and to registration and supervision arrangements set up by an independent competent authority (subject to the existing carve-outs for credit institutions and payment and e-money institutions).
- There is a new option for member states to decide not to apply the admission and registration requirements to suppliers of goods or providers of services who qualify as micro, small and medium-sized enterprises (SMEs) as defined in Recommendation 2003/361/EC, acting as: (a) credit intermediaries in an ancillary capacity; or (b) creditors in an ancillary capacity, granting credit in the form of deferred payment to purchase goods and services offered by them, if the credit is provided free of interest and with only limited charges payable by the consumer for late payments imposed in accordance with national law.
Advertising
- In new provisions, member states must introduce requirements that any advertising and marketing communications concerning credit agreements are fair, clear and not misleading. There must also be a prohibition on wording in those advertising and marketing communications that may create false expectations for a consumer in relation to the availability or the cost of credit or the total amount payable by the consumer.
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In recognition of increased digitalisation, greater flexibility has been introduced in relation to certain items of the required standard information to be included in advertising which indicates an interest rate or any figures relating to any cost of credit to the consumer where the medium used makes it difficult to display all information, by allowing for that information to be accessed by clicking, scrolling or swiping.
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There is a new requirement on member states to prohibit advertising for credit products which:
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encourages consumers to seek credit by suggesting that credit would improve the financial situation of those consumers;
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specifies that outstanding credit agreements or registered credit in databases have little or no influence on the assessment of a credit application;
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falsely suggests that credit leads to an increase in financial resources, constitutes a substitute for savings or can raise a consumer’s living standards.
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There is also a new option for member states to ban, among other things, advertising for credit products which highlights the ease or speed with which credit can be obtained; states that a discount is conditional on taking up credit; offers ‘grace periods’ of more than three months for the repayment of credit instalments.
General information
- A new requirement is introduced for creditors or, where applicable, credit intermediaries, to ensure that certain ‘clear and comprehensible’ general information about credit agreements is made available to consumers at all times on paper or on another durable medium chosen by the consumer. That general information includes a representative example of the total amount of credit, the total cost of the credit to the consumer, the total amount payable by the consumer and the annual percentage rate of charge, an indication of possible further costs, not included in the total cost of the credit to the consumer, to be paid in connection with a credit agreement, and the range of different options available for reimbursing the credit to the creditor, including the number, frequency and amount of the regular repayment instalments.
Pre-contractual information
- There is now an obligation to remind the consumer of the right to withdraw 1 to 7 days after the credit agreement is entered into where the pre-contractual information is provided less than one day before the credit agreement is entered into.
- The prescribed form of pre-contractual information (Standard European Consumer Credit Information form – SECCI) is different from CCD I, with certain required information having to be stated on a single page and if this is not possible two pages at most with certain information having to appear on the first page. The following pages then have the required additional detail. While the information required is very similar to that included in the pre-contractual information under CCD I, the new layout means that significant systems changes are likely to be required.
- New information required in the SECCI includes an indication that the price was personalised on the basis of automated processing, including profiling (where applicable).
- In another nod to the practical realities of increased digitalisation, there is a new provision requiring that information displayed in the SECCI shall be consistent, clearly legible and take into account the technical constraints of the medium on which it is displayed. In addition, information must be displayed in an ‘adequate and suitable way’ on the different channels, taking into account interoperability. As for the changes in relation to advertising (see above), this gives creditors greater flexibility in how the information can be presented.
- There is no special regime for overdraft facilities.
Creditworthiness assessments and databases
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The CCD II requirements for creditworthiness assessments are more detailed than under CCD I, with specific reference to preventing irresponsible lending practices and over-indebtedness. New provisions include:
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A requirement for creditors to establish procedures for the creditworthiness assessment and to document and maintain those procedures as well as the information on the consumer’s income and expenses and other financial and economic circumstances used to carry out the assessment.
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A requirement that a creditor must not subsequently cancel or modify a credit agreement on the grounds that the creditworthiness assessment was incorrect, except where the consumer knowingly withheld or falsified information.
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Where the creditworthiness assessment involves the use of automated processing of personal data, consumers must be informed of their right to request and obtain human intervention from the creditor, consisting of:
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a clear and comprehensible explanation of the assessment of creditworthiness, including the logic and risks involved in the automated processing of personal data as well as its significance and effects on the decision;
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the right to express the consumer’s own point of view to the creditor; and
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the right to request a review of the creditworthiness assessment and the decision on the granting of the credit by the creditor.
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In the case of cross-border credit, there is now express reference to the fact that the conditions for creditors’ access to creditworthiness databases in other member states must be non-discriminatory.
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There are a number of additional provisions on creditworthiness databases, including:
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A requirement that only those creditors who are under the supervision of their national competent authority and who fully comply with the General Data Protection Regulation ((EU) 2016/679) (GDPR) have access to the databases;
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A provision specifying the minimum data requirements for the databases, namely information on consumers’ arrears in repayment of credit, the type of credit and the identity of the creditor;
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A restriction on the types of data that can be used by creditors and credit intermediaries, with a prohibition on the processing of special categories of data as referred to in Article 9(1) of the GDPR and personal data processed from social networks that may be contained in databases in other member states.
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A requirement on database providers to ensure that data is up to date and accurate, with borrowers to be informed within 30 days if any arrears are registered, as well as of their rights under the GDPR.
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A requirement for member states to ensure that complaint procedures are in place to allow consumers to challenge the content of databases, including information that can be obtained by third parties through those databases.
The credit agreement
Overdrafts and overrunning
Overdrafts
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As mentioned above, the “lighter touch” regime for overdrafts in CCD I has been removed for pre-contract information and the credit agreement.
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The requirement to provide consumers with a statement of account now stipulates that the statement must be provided at least once a month.
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The requirement to keep the consumer informed of any changes to the borrowing rate or charges has been amended to stipulate that such information must be provided "in good time". There is also more flexibility as to where the rate changes can be published with reference to a creditor’s website and mobile app.
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There are new provisions introducing obligations for the creditor when reducing or cancelling an overdraft facility.
- Member states also now have an express option to maintain or adopt more stringent consumer protection provisions in relation to overdrafts.
Overrunning
- For the information requirements relating to overrunning, the consumer can now choose whether that information is received on paper or another durable medium.
- Where there is regular overrunning, the creditor now needs to either offer the consumer advisory services or direct them to free debt advisory services.
Variations
- Changes in relation to variations of the credit agreement include the addition of a new provision requiring creditors to provide consumers with specific information on the variation before it takes place. This includes information on how to complain about the changes.
Right of withdrawal
- There is the addition of a longstop date of 12 months and 14 days after the conclusion of the credit agreement for the expiration of the withdrawal period where the consumer hasn’t received the terms and conditions of the credit agreement and other required information. However, this longstop date won’t apply if the consumer hasn’t been informed of their right of withdrawal.
- Another new provision provides that for linked credit agreements for the purchase of goods with a return policy that ensures a full refund for a certain period of time exceeding 14 calendar days, the right of withdrawal shall be extended to match the duration of the return policy.
New requirements where there is no equivalent in CCD I
Non-discrimination
- Member States must ensure that the conditions to be fulfilled for being granted credit do not discriminate against consumers legally resident in the EU on the grounds of their nationality or place of residence or on any ground as referred to in Article 21 of the Charter of Fundamental Rights of the European Union, when those consumers request, conclude or hold a credit agreement within the EU. However, different conditions of access to credit can be offered where they are objectively justifiable.
Personalised offers on the basis of automated processing
- Without prejudice to the requirements of the GDPR, creditors and credit intermediaries must now inform consumers in a clear and comprehensible manner when they are presented with a personalised offer that is based on automated processing of personal data.
Tying and bundling practices
- Subject to limited exceptions, bundling practices are permitted but tying practices must be banned by member states.
- Member States may allow creditors to require the consumer to hold a relevant insurance policy related to the credit agreement, taking into account proportionality considerations. However, the creditor will be required to accept the insurance policy from a supplier other than their preferred supplier where such insurance policy has an equivalent level of guarantee, without modifying the conditions of the credit offered to the consumer. Consumers must be given at least three days to compare insurance offers related to credit agreements without such offers being changed.
- A “right to be forgotten” for cancer survivors is introduced, with member states having to require that personal data concerning consumers’ cancer diagnoses are not used for the purpose of an insurance policy related to a credit agreement after a period of time determined by the member states. That period must not be more than 15 years following the end of the consumers’ medical treatment.
Inferred agreement for the conclusion of any credit agreement or the purchase of ancillary services
- The agreement of the consumer to the conclusion of any credit agreement or the purchase of ancillary services cannot be inferred by creditors and credit intermediaries from default options such as pre-ticked boxes. Instead, the agreement must be given by an ‘unambiguous and clear affirmative act establishing a freely given, specific, informed and unambiguous indication of the consumer’s approval to the content and substance associated to the boxes’.
Advisory services
- A number of new requirements relating to the provision of advisory services by creditors and credit intermediaries are introduced. These include information requirements and the required process for making a recommendation to the consumer.
Ban on unsolicited granting of credit
- Any granting of credit to consumers without their prior request and explicit agreement must be prohibited by member states.
Measures to limit borrowing rates, annual percentage rates of charge or total cost of credit to the consumer
- Member states must introduce measures such as caps to effectively prevent abuse and to ensure that consumers cannot be charged excessively high borrowing rates, annual percentage rates of charge or total costs of credit.
- There is also an option for member states to adopt prohibitions or limitations regarding specific charges or fees applied by creditors.
Conduct of business obligations and requirements for staff
- There are a number of new conduct of business obligations for creditors and credit intermediaries, including an overarching obligation to act ‘honestly, fairly, transparently and professionally’ and to ‘take account of the rights and interests of the consumers’ when carrying out specified consumer credit activities including manufacturing and advertising credit products and granting, intermediating or facilitating the granting of credit.
- Remuneration practices are also addressed, with (among other things) members states able to prohibit or impose restrictions on the payments from consumers to creditors or credit intermediaries before the conclusion of a credit agreement.
- Regarding the staff of creditors and credit intermediaries, creditors and credit intermediaries will be required to ensure that they possess and keep up-to-date an appropriate level of knowledge and competence in relation to key consumer credit activities, as well as in relation to applicable consumer rights. Member states must make sure that compliance with these requirements is supervised by the competent authorities, and that the competent authorities have powers to require creditors and credit intermediaries to provide necessary evidence to enable such supervision. Minimum knowledge and competence requirements must also be established by member states.
Financial education and support to consumers in financial difficulties
- There are new provisions relating to member states having to promote measures that support the education of consumers in relation to responsible borrowing and debt management.
- There are also new provisions on arrears and forbearance, including that creditors will be required, where appropriate, to exercise reasonable forbearance before enforcement proceedings are initiated. Such forbearance measures shall take into account, among other things, the consumer’s individual circumstances. However, creditors won’t be required to repeatedly offer forbearance measures to consumers, unless in justified cases.
- Independent debt advisory services must be made available to consumers experiencing or who might experience financial difficulties, and the charges for such services must be limited. Creditors must have processes and policies for early detection of consumers in financial difficulties to facilitate referral to the debt advisory services and those services must be easily accessible to the consumer.
Next steps
CCDII came into force on 19 November 2023. Member states now have until 20 November 2025 to adopt and publish the laws, regulations and administrative provisions necessary to comply with CCD II, and the implementing measures will have to be applied 12 months from the transposition date, ie 20 November 2026. This is also the date on which CCD I will be repealed. However, CCD I will continue to apply to any credit agreements concluded between entry into force of CCD II and its date of application until their termination. There is one exception to this in relation to certain provisions of CCD II which will apply to all open-end credit agreements existing on its date of application.
If you would like to discuss this development and how we can help, please get in touch with one of the people listed above or your usual Hogan Lovells contact.
The UK perspective: Consumer Credit Act reform on the horizon
In July 2023 the UK government published its response to a first-stage consultation on the strategic approach to reforming the Consumer Credit Act 1974 (CCA), described in the response as ‘an ambitious overhaul’ of the regime. The government has been working on policy development to produce more detailed proposals. The aim was to publish a second stage consultation in 2024, but we are now awaiting next steps following the General Election on 4 July 2024. For more on the consultation response, take a look at this Engage article: ‘UK Consumer Credit Act 1974: HM Treasury responds to first stage consultation on reform’.
For the latest on the work to bring BNPL products within the UK regulatory perimeter, take a look at our previous article ‘EU Second Consumer Credit Directive: Scope and impact for buy-now pay-later (BNPL) providers’.
Authored by Eimear O’Brien, Sebastien Gros, Franck Dupret, Julie Patient, and Virginia Montgomery.
Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.
